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As healthcare and the life science space continue to evolve, the term “diagnostic” is taking on more and more meanings—and branding yourself as simply a “diagnostics company” is becoming increasingly ambiguous. This growing intricacy lends itself to the difficulties inherent in the sector. Whether you are developing a molecular-based point-of-care (PoC) diagnostic, a new in vitro diagnostic (IVD) test used in a clinical laboratory, a companion diagnostic for an oncology therapeutic or a biomarker discovery platform, there are some distinct challenges standing in the way of your technology and a successful exit.

Taking a look at some of the happenings in the diagnostics sector, some data from the LSN Investor Platform, and some of the things we’ve heard from diagnostic investors helps paint a better picture of the market, elucidating some guidelines to follow and common pitfalls to avoid for entrepreneurs developing diagnostic products/services.

As diagnostic technologies mature, we are seeing them make a push into the marketplace, sometimes figuring out how they fit in along the way. Point-of-care diagnostics, in particular, are expanding and evolving from pure technology development to applications development in various settings. As the assortment of new diagnostics find their niche in the healthcare marketplace, some investors tend to be somewhat reluctant to dive in headfirst, given the impediments these companies are bound to run into.

At LSN, we have spoken to over 900 investors in the last year about their specific interests and investment criteria in the life science space. Figure 1 shows the percentage of investors by type who have expressed interest in diagnostic products or services.

Figure 1 | LSN Investor Platform | Data as of December 7, 2015

It’s not surprising that a large proportion of the government organizations and foundations we’ve spoken with are backing diagnostics companies, given their ability to take on more risk and invest at early stages, and the fact that they don’t require the returns typical of venture firms. However, as these technologies continue to mature and gain traction in the clinic/marketplace, traditional venture capital investors are becoming more active. On the federal level, President Obama’s Precision Medicine Initiative should also help bolster the diagnostics sector.

Taking a view of where these investors interested in diagnostics are looking to deploy capital, Figure 2 shows a mix of regionally-focused investors as well as investors with a global focus, with North America significantly out in front in terms of investor regional focus.

Figure 2 | LSN Investor Platform | Data as of December 7, 2015

There’s a lot of excitement surrounding the potential of diagnostics to improve outcomes and access to care, reduce the cost of care, and help spearhead personalized medicine, among other things. However, some investors voice concerns about reimbursement rates for diagnostics. We’ve heard from multiple investors that it is extremely important to engage payers very early and start the conversation, not waiting until you have the perfect amount of data. Many investors have said they are not interested in “me-better” tests that merely aim to replace an existing product, but rather something with a new business model that unlocks value within the healthcare system to deliver a huge upside, as this helps counter the reimbursement risk. Tests that have clinical utility and are going to change the treatment paradigm are typically more appealing to investors. A strong management team is always heavily favored when investing in early stage companies, but given these challenges, investors tend to place a premium on the quality of teams developing diagnostics.

The LSN team will continue to track diagnostic companies, deals in the space, and the investors that fund these companies, bringing you updates along the way.

Hot Mandates

The firm is focused on therapeutics companies and does not invest in medical devices, diagnostics, or digital health. The firm is open to considering assets of very early stages, even those as early as lead optimization phase. The firm considers various modalities, including antibodies, small molecules, and cell therapy. Currently, the firm is not interested in gene therapy. Indication-wise, the firm is most interested in oncology and autoimmune diseases but has recently looked at fibrotic diseases and certain rare diseases as well.

The firm is opportunistic across all subsectors of healthcare. Within MedTech, the firm is most interested in medical devices, artificial intelligence, robotics, and mobile health. The firm is seeking post-prototype innovations that are FDA cleared or are close to receiving clearance. Within therapeutics, the firm is interested in therapeutics for large disease markets such as oncology, neurology, and metabolic diseases. The firm is open to all modalities with a special interest in immunotherapy and cell therapy.

A strategic investment firm of a large global pharmaceutical makes investments ranging from $5 million to $30 million, acting either as a sole investor or within a syndicate. The firm is open to considering therapeutic opportunities globally, but only if the company is pursuing a market opportunity in the USA and is in dialogue with the US FDA.

The firm is currently looking for new investment opportunities in enterprise software, medical devices, and the healthcare IT space. The firm will invest in 510k devices and healthcare IT companies, and it is very opportunistic in terms of indications. In the past, the firm was active in medical device companies developing dental devices, endovascular innovation devices, and women’s health devices.

A venture capital firm founded in 2005 has multiple offices throughout Asia, New York, and San Diego. The firm has closed its fifth fund in 2017 and is currently raising a sixth fund, which the firm is targeting to be the largest fund to date. The firm continues to actively seek investment opportunities across a […]

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